Record Revenues, Fee Income Boosts U.S. Bancorp

U.S. Bancorp (USB) reported fourth quarter profits 82% better than last year, powered by record revenue growth of $4.4 billion for the quarter. Expansion of its asset base through acquisitions and the growth of fee-related businesses, including merchant banking services were the keys to its success, but credit losses, while decreasing, continue to be a drag on earnings.The nation's sixth largest bank posted profits of $602 million or 30 cents per share. Wall Street had expected the bank to post earnings of 26 cents per share for the fourth quarter.

In a statement, U.S. Bancorp Chairman, President and Chief Executive Officer Richard K. Davis said, "The strong growth in net revenue, the result of our expanding balance sheet and fee-based businesses, as well as recent investments in our branch network and various growth initiatives, was the primary driver behind the increase in fourth quarter earnings compared with the same period of 2008."

The company enjoyed strong growth of its core assets during the quarter as average deposits surged 25%, and net interest income grew 9.2% over the fourth quarter of 2008. Its acquisitions of BB&T's Nevada banking operations and nine banks owned by FBOP Bank had a lot to do with that, adding over 160 branch locations and more than $15 billion in deposits. The bank also picked up $13.2 billion in loans from FBOP, all of which are covered by loss-sharing agreements with the FDIC, lowering the risk.

Revenue from non-interest income grew by 27%, including credit and debit card revenue, corporate payments products revenue and merchant banking services revenue and investment management. The company believes many of these areas can be maintain steady income production or have room for future growth.

Credit Costs Impact Earnings

Nonperforming assets and net charge-offs for credit losses both increased during the quarter, but at a slower pace. The company increased its provisions for credit losses by $1.4 billion to protect against losses in its commercial, commercial real estate and consumer loan portfolios due to continued difficult economic conditions. Davis acknowledged that "Credit costs remained elevated and continued to have a significant impact on earnings."

During its earnings call on Wednesday, the company was upbeat about its ability to generate strength from its loan portfolio during the economic downturn. The company said it had $33.7 billion in new loan activity during the fourth quarter and $129 billion in new lending for the year, but expected that growth to drop off next quarter.

"We are willing to lend, but there's no demand," David said during the call, noting consumers had become more cautious about taking on debt. However, the company said it is going back to look at business loans that were rejected late last year to see if those applicants can be helped because the economic environment for lending has shifted.